KB Home thinks small to spur sales

updated 6:58 p.m. ET June 29, 2007

LOS ANGELES - KB Home is discovering that less could be more when it comes to luring skittish buyers in a housing slump.

In recent months, the company has rolled out a new line of smaller, more affordable homes that it hopes will jump-start sagging sales.

The move by one of the nation’s largest homebuilders comes amid a worsening housing slump that analysts now say could last for several more years.

“Smaller homes generate lower revenues, but they sell faster, therefore the cash returns are better,” said KB Home’s chief executive, Jeffrey Mezger.

Other major builders, including Fort Worth, Texas-based D.R. Horton Inc., also have started downsizing some home offerings. But KB Home has led the way, said Greg Gieber, an analyst with A.G. Edwards & Sons Inc.

“They understand the balance, what they can take away and how much they can reduce price having taken that amenity away,” he said.

Despite the new strategy, KB Home wasn’t able to avoid a disappointing second-quarter. On Thursday, it reported a second-quarter loss of $148.7 million, or $1.93 per share, as it booked a charge due to unsold inventory.

It also posted a 36 percent decline in revenue compared to the year-earlier quarter.

It attributed the loss to the oversupply of homes and declining demand. KB Home declined to give future earnings estimates or project when the housing market might rebound.

Miami-based Lennar Corp. also reported sharp second-quarter losses this week.

Meanwhile, the Commerce Department reported that sales of new homes fell in May by 1.6 percent, the fourth decline in five months. The median selling price of a home fell nearly 2 percent to $236,200.

Some analysts are now projecting it could take as long as four years for builders to sell off excess inventory. Homebuyers can expect more discounting this year, according to Gieber and other analysts.

“What you really need is a much sharper rampdown in production, and that’s what has to be driven home to the builders,” Gieber said.

Like other homebuilders, Los Angeles-based KB Home has struggled to find buyers as would-be purchasers wait for prices to tumble before jumping into the market.

Homebuilders incur losses every day a new home stands empty. They have tried everything from slashing prices to tossing in free kitchen upgrades to entice buyers.

KB Home differs from many other homebuilders because it doesn’t build a house until it has a buyer under contract. Other companies complete construction then seek buyers.

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